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Incorporating main contract terms into a sub-contract

There are a number of interesting aspects to HHJ Keyser QC’s judgment in Dawnus Construction Holdings v Amey LG Ltd, not least that during the course of the project, the parties referred four separate disputes to four different adjudicators. That makes it a really good example of serial adjudication, if ever I saw one. It also demonstrates some of the difficulties that can arise on construction projects, particularly when parties seek to incorporate main contract terms into a sub-contract.

The judgment explains that matters decided by Mr Turner and Mr Simper were relied on by Mr White and Mr Higgins when they reached their decisions and that, once the project came to an end, Dawnus wanted to litigate certain matters. If those matters were decided in its favour, up to an additional £1 million would be due to it.

However, there was a (potential) spanner in the works, namely whether the Services Agreement was subject to the dispute resolution provisions of the Main Contract. If it was, then there could be no legal proceedings. This was because clause 63 of the Main Contract contained a condition precedent to litigation: a party had to refer a dispute to adjudication (clause 63.1) and then give a notice of dissatisfaction before it was permitted to commence legal proceedings (clause 62.11). That notice had to be given within four weeks of the adjudicator’s decision (clause 63.2). At the very latest, this would be in August 2015 and could only relate to Mr Higgins’ decision. It isn’t clear exactly when Dawnus decided it wanted to litigate the dispute but clearly (unless it had served a notice of dissatisfaction within the prescribed period) it was considerably out of time by early 2017 when the declaratory relief proceedings were issued.

Was clause 63 of the Main Contract incorporated into the Services Agreement?

In short, yes, HHJ Keyser QC decided that it was. He reached this conclusion by applying the relevant principles governing the construction of contracts (Arnold v Britton, Rainy Sky v Kookmin Bank), noting that a contract:

“…should be given the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person… to whom the document is addressed.”

Here, this meant looking at the terms of the Services Agreement and its Recitals, particularly Recital 3, which said that:

“The terms and conditions of the Main Contract shall apply (save where the provisions of the agreement conflict or otherwise specifically require) as if they were repeated in this agreement…”

The court focused on the reference to “conflict” in Recital 3. In the context of the Services Agreement and the Main Contract, this meant looking at how the two contracts dealt with disputes and establishing whether there was any conflict.

The court decided that Clause 20 and Appendix 12 of the Services Agreement dealt with the referral of disputes to adjudication. In the usual way for construction contracts, this right could be exercised “at any time” and the adjudicator’s decision was binding until the dispute was determined by legal proceedings or agreement. It decided that clause 60 of the Main Contract also provided a right to adjudicate disputes. However, this contract went further and required the giving of a notice of dissatisfaction (clause 62.11) before litigation could follow. This notice had to be given within four weeks (clause 63.2). The court described clause 63.2 as the critical provision.

The court noted Dawnus’ argument that to import clause 63 into the Services Agreement would radically alter its meaning, but was not persuaded by it. Similarly, it rejected the argument that a party that is giving up valuable rights must make it clear that that is what it intends to do (Nobahar-Cookson v The Hut Group). Instead, it concluded that the Services Agreement permitted the parties to litigate unconditionally, whereas the Main Contract contained a fettered right to litigate. Clause 20 and Appendix 12 of the Services Agreement dealt with adjudication, as did clause 60 of the Main Contract. However, clause 63 was not part of the Main Contract’s adjudication provisions. Instead, clause 63 dealt with the right to litigate. It restricted that right, but it was not a “conflict or contradiction” to transpose it into the Services Agreement. The court went further:

“The result gives rise to no commercial absurdity. There is nothing contrary to common sense in having a restriction on the right to litigate. There are obvious reasons why parties may find certainty and finality advantageous.”

Principles of construction

Regardless of what you think of this outcome, one thing that struck me was the court’s use of the recitals to interpret what the parties had contractually agreed to. There is no doubt that Recital 3 was “clear and unambiguous”, but did the parties really understand its impact? Certainly, I suspect that Dawnus did not appreciate its impact or believe that it was bound by clause 63 because, if it did, one wonders why notices of dissatisfaction had not been given as required.

As I understand it, there are differing views as to the nature, use and importance of recitals and, of course, their use as an aid to the interpretation of a contract. Some believe that they do not automatically form part of the parties’ operative, legally binding agreement. Others, actively avoid the issue by stating expressly that the recitals are not binding in the agreement’s interpretation clause. However, neither of these points seem to have been aired before HHJ Keyser QC. I guess as so often is the case, it would appear that whether the recitals have legal effect will depend on the construction of the particular contract, taken as a whole.